Qualifying for loans has grown tougher in the past decade

Kathleen Peddicord, The Washington Post

Published
2:16 pm PDT, Thursday, May 31, 2018

Most foreign buyers purchase real estate internationally with cash. But there are other ways to buy property overseas, such as borrowing from a local lender, obtaining financing through the seller or developer, and tapping your IRA. Some options are easier than others, but all three come with challenges.

American April Hess borrowed from a Belize bank to finance the construction of her house on Panama's Pacific coast.

The most the Belize bank was willing to lend was 50 percent of the property's value. Hess obtained a 30-year mortgage, but the terms include a five-year renewable balloon, meaning she must requalify every five years.

Still, "I found it easier than dealing with Panama banks for a construction loan," Hess says. "Plus, bankers in Belize speak English."

This unconventional financing strategy (most banks do not offer financing outside their home countries) allowed Hess and her partner, retirees with a limited budget, to build an ocean-view house they otherwise would not have been able to afford.

"The financing we were able to arrange has allowed us to realize the dream we've had for decades of retiring on the water," Hess said. "And we were able to draw down from the approved loan amount as we needed the cash to make construction payments."

Qualifying as a foreigner for a mortgage in another country typically requires the same debt-to-income ratios you find when applying for a mortgage in the United States. One important difference in the process is that most banks require you to obtain a local life insurance policy naming the bank as the beneficiary. This limits the length of the mortgage as most insurance companies outside the United States won't issue life insurance past age 70 or 75. If you're 65 years old, you're looking at a 10-year loan.

Bank financing is more difficult in many countries than it was in the past. Ten years ago, when global real estate investor Lief Simon decided to purchase a rental property in Panama City, he identified a building under construction at a prime city-center location. The developer was selling the apartments pre-construction.

Simon chose his unit and then approached one of the many international banks in Panama City about financing options.

Scotiabank preapproved Simon for financing based on his U.S. tax returns and his U.S. credit report, offering a 70 percent loan to value (LTV) mortgage. It was a 25-year loan with a variable interest rate of 6.25 percent. Because the developer required a down payment of 30 percent, the loan worked well for Simon.

Those terms are typical in today's market. The difference is that it's more difficult than it was a decade ago for foreign property buyers to qualify for a loan. Since the Panama Papers debacle, banks have become more restrictive in their lending practices.

Today the Dominican Republic is the easiest place in the Americas for a foreign buyer to qualify for a mortgage. Because the country is eager to attract foreign investment, banks offer financing to foreigners at a fixed rate of 8 percent.

Bank financing can be easiest in Europe, although the proof-of-income documentation requirements are often greater than for a U.S. bank loan. Typically you'll be asked to produce your tax returns from the most recent three years and bank statements for six months to prove your income supports the amount of the loan. If you don't have a regular paycheck - say you are self-employed or own your own business - your file probably won't pass muster. However, if your income qualifies, it can be possible to obtain a loan to buy real estate in France, Spain, Britain, Ireland or Portugal.

A couple - one American, the other Swedish, in their 30s - who live in London and each earn high salaries were approved for a 70 percent loan to value mortgage with a variable interest rate mortgage on the purchase of a half-million euro house in Portugal.

In most of the world, bank financing is not an option for a foreign property buyer. In markets where no bank will lend to you, one alternative is negotiating terms with the seller - usually a private owner or a developer. Developer financing is more common than it has ever been. Builders in emerging markets understand that Americans - one of their biggest pools of potential buyers - no longer have access to the ready cash they once had back home in the form of a second mortgage or line of credit for real estate they own in the United States.

Private sellers typically offer terms such as 50 percent down at closing and the remaining 50 percent due at regular intervals over, say, five, seven or 10 years. This is how Simon purchased his commercial rental property in Panama City three years ago. In that case, the private seller agreed to 20 percent down with the remaining 80 percent due over 10 years.

Some developer financing allows for a lower down payment or even zero down on rare occasions. Interest rates can be 5 percent to 15 percent, and 10 years is a typical term with a balloon payment due at that time.

Developer financing tends to be an easier route than a bank mortgage because it typically doesn't require proof of income. The developer won't transfer title until the property has been paid off, so their risk is low.

Dusty Tubbs, a retiree from Hawaii, bought his property in Cayo, Belize, by taking advantage of appealing terms offered by a developer. Tubbs bought his $28,000 lot in a small, self-sufficient community by making a $500 down payment and agreeing to payments of $500 a month until the lot is paid off. He can begin building a house as soon as he is ready; however, the developer will hold the title until the land is paid in full.

Tapping your IRA is another way to purchase property overseas. However, most IRAs don't allow for "nontraditional" investments such as foreign real estate. These restrictions are imposed by the IRA custodian, not the Internal Revenue Service.

"The only real IRS restriction on using IRA funds to buy real estate in another country is that you can't self-deal," said Vincenzo Villamena, an international tax professional and CPA. "That means you can't use a property you buy with your IRA funds yourself, making an IRA a great source of capital for the purchase of an investment property overseas."

Roth IRA funds offer the most tax-efficient approach to investing in foreign property. Because Roth growth and distributions are tax free in the United States, if you use Roth funds to buy in a market where the profits won't be taxed in the country of origin, your returns are untaxed.

"On the other hand," Villamena said, "investing in a high-tax country with your traditional IRA can mean you're taxed twice - once in the country of investment and again when you eventually withdraw funds out of your IRA."

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Peddicord has been researching, writing and speaking about living, retiring and investing overseas for more than 30 years. She is the author of "How to Buy Real Estate Overseas" and founder of the website LiveandInvestOverseas.com.